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Financial Spread Betting

Introduction
Financial spread betting is one of many forms of investing and trading the global financial markets, regulated by the UK’s Financial Services Authority (FSA). From one trading account you have access to UK, European, US and Asian stocks, indices, currencies, commodities and bonds.

Financial Spread Betting offers a tax free method of speculating on financial markets. Quite simply, if you think a particular index, share, commodity, currency or sector will rise, you place an UP bet. This also referred to as a Long position or a buy. On the other hand if you think the particular market will fall you place a DOWN bet (commonly referred to as a Short position or a sell).The amount of profit you make or money you lose depends on how right or wrong you were and how much you risked per point.

At the time of placing the bet you decide how much you would like to risk per point. This can be as small as £1 or a large amount such as £1000+.

Most bets work on either a daily, rolling or contract month basis.

A Daily bet is one which is only open during one particular trading day. You could place the trade at 11am and, if you do not close it beforehand, it will be closed at the end of trading (4.30pm in the case of the FTSE 100).

A Rolling bet is one which, unless you state otherwise, rolls through to the next trading day. This costs a little money and your bookmaker should be able to give you more details.

A trade opened for a particular Contract Month will end up to 3 months in the future. There will be a specific date when the contract finishes known as the Expiry Date or Last Trading Day.

For example, if you opened a trade on the FTSE 100 September contract, the expiry date will be in September, usually the third Friday. The trade will expire at the close of trading on that day.

Some bookmakers also run other types of bets such as weekly and also "Year End".

Day-traders or "scalpers" will tend to use Daily or Rolling bets but as a beginner it may be wiser to trade over a longer time frame. If you decide to day trade, bear in mind that you must be correct almost immediately to profit. If you select a longer time scale, you have some breathing space for the trade to turn around.

An example of a trade

It is January and the FTSE 100 is trading at around 5000 and you are confident that it will go higher before September. To back your opinion you decide to use a spread bet.

Logging onto your internet account, the bookmaker quotes you 5010-5020 for the FTSE 100 September contract.

This means that you can buy (go long) at 5020 or sell (go short) at 5010.

Spread betting quotes are always displayed as two seperate prices. You buy at the higher price and sell at the lower one. The "spread" itself (in this case 10) is a charge added by the bookmakers. Different companies have different spreads, some larger than others.

As you are backing the market to go higher, you would buy £1 a point (or however much you like) at 5020.

September arrives and you are close to the expiry date for the contract.

Rather than wait for the last trading day you decide to take your profit as the FTSE 100 is now quoted at 5305-5315.

You close your position by selling £1 per point at 5305.

As you were correct in thinking the FTSE would rise, you have now won £285:

(5305 - 5020) x £1 = £285 tax free

There is no need to hold your position until expiry, you can close it at any time to take your profit or limit your loss.

If the FTSE had been trading at 5500 in July, you could have closed then for more profit. All you have to do is log into your account and place another trade in the opposite direction for the same amount per point to close.

Of course, if the FTSE had gone lower in this example you would've lost money but you can use stop losses to limit the loss. Stop losses will be covered later in this guide.

An Explanation of the Markets You Can Trade

All spread betting companies offer a large range of markets to trade. The most common are as follows:

Indices

These include the FTSE 100, Dow Jones 30, S&P 500, the Nasdaq, the Nikkei, the German DAX, the French CAC and the Swiss SMI amongst others.

Each index is made up of shares from its respective country. The FTSE 100 contains the largest 100 shares in the UK or rather, the 100 biggest companies by Market Capitalisation (Market Cap for short).

The Market Cap is calculated by multiplying the share price by the number of shares available.

For example: If the ABC company has 1,000,000 shares available and each share has a value of £10 then the Market Capitalisation of ABC is £10million.

Many traders stick to the well known indices such as the FTSE and the Dow but they may well be missing out of hundreds of trading opportunities by doing so.

Equities

Equities are simply single shares in companies such as BP, Vodafone, IBM, Microsoft, Google etc

You will find that all spread betting firms quote prices for hundreds of shares from large companies such as HSBC, Tesco and BT down to smaller FTSE 350 companies such as Domino's Pizza and Synstar.

Most firms will also quote a massive range of American and European shares with gives you a huge range of trading opportunities.

Currencies

The Foreign Exchange market provides yet more trading vehicles. The main currency pairings include the GBP/USD (Pound vs US Dollar or "Cable"), USD/YEN (US Dollar vs Yen), GBP/EUR (£ vs Euro) etc

There are also several other markets to choose from which include the CAD (Canadian Dollar), the AUD (Australian Dollar), the RAND (South African currency), the CHF (Swiss Franc) and more.

Currencies are always quoted in pairs and so if you place a BUY bet on a pair, you are betting that the first currency will get stronger against the second. Buying the GBP/USD means you are backing the Pound to strengthen against the Dollar. Selling the GBP/USD means you are backing the Pound to weaken against the Dollar.

If you have any difficulty working out which way to bet, ring your spread betting company and explain exactly what it is you want to do. They will understand if you say "I want to back the Pound to strengthen against the US Dollar" and will read back your bet before it is final to make sure there are no mistakes.

Commodities

These can be split into sections as follows:

Energies such as Crude Oil, Unleaded Gas, Heating Oil, Natural Gas and Propane

Grains - Wheat, Corn, Soybeans, Oats etc

Meats - Live Cattle, Feeder Cattle, Lean Hogs and Pork Bellies

Metals - Gold, Silver, High Grade Copper, Platinum, Palladium, Aluminium etc

Softs - Cotton, Orange Juice, Coffee, Sugar, Cocoa and Lumber

Sectors

Some spread betting companies also offer prices on UK and US industry sectors.

For example: A position on the FTSE 350 Mining sector in effect gives you a position on 9 FTSE 350 mining companies. The constituents of this sector are:

Anglo American, Antofagasta, Aquarius Platinum, BHP Billiton Plc, Lonmin, Randgold Resources, Rio Tinto, UK Coal and Xstrata Plc.

As you can see, you are in no way limited by the number of markets you can choose to trade. If you look at little further than the FTSE and Dow, you should be able to find valid trading opportunities each and every week.